Wall St Week Ahead: Obama's shoes hard to fill, even for himself

NEW YORK – Regardless of the results of Tuesday's U.S. presidential election, the next four years will be a tough act to follow from Wall Street's vantage point.

The benchmark Standard & Poor's 500 Index has rallied 66 percent since President Barack Obama took office - one of the most impressive runs ever for stocks under a single president. Admittedly, the timing of his inauguration - just before the market hit a nadir in March 2009 - is part of the reason.

The national polls show a tight race between Obama and his challenger, Republican candidate Mitt Romney, but leaning toward a win by the president.

"The market might like the fact of an Obama win since it would mean less uncertainty," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, in Cincinnati.

Strategists have said the market's pattern of late also suggests status quo - an Obama win. A "Romney rally" is a 1-in-3 possibility, taken betting site InTrade's odds of an Obama win at about 67 percent right now. Other prognosticators put his chances of re-election even higher.

The most recent Reuters/Ipsos tracking poll shows both candidates garnering 46 percent of the vote - but polling averages show Obama with small but critical leads in swing states Ohio, Virginia and Iowa.

There's a conventional line that says a victory by longtime businessman Romney would be better for the equity market, given his predilection for fewer regulations and lower corporate tax rates. Still, any move in the market, no matter the outcome, is likely to be limited.

"I think the market has priced in an Obama victory, but no matter what, any knee-jerk reaction after the election will unwind over the next few days," said Joseph Tanious, a global market strategist at J.P. Morgan Funds, in New York.

"The fiscal cliff is also on everyone's mind, but that will really take hold after the election, since the winner could indicate what happens."

Strategists at LPL Financial have been tracking two baskets of stocks to judge whether the market believes Obama or his challenger Romney will emerge with a win. The "Obama" stocks include health care facilities companies, food and staples, utilities, construction companies and homebuilders. The "Romney" stocks include financials, coal stocks, oil and gas drillers, telecom, and specialty retail names.

The Obama index peaked in early October, before the first debate, largely seen as being won by Romney. Yet in terms of "relative strength," the index still modestly favors the president.

CHANGE AT THE FED?

The move in the market during Obama's administration was in part due to timing as the U.S. economy started to recover from the deepest recession since the Great Depression.

The U.S. Federal Reserve has used three rounds of asset purchases, one of which is under way, as a way to keep interest rates low and stimulate the economy as the recovery from the 2007-2009 recession has been painfully slow.

Romney has criticized the Fed's policy and is seen replacing Chairman Ben Bernanke with someone more likely to tighten monetary policy.

"With Romney, we'd expect a little more weakness off the gate. He might want to put a stop to the Fed's stimulus. That's where that uncertainty comes in," Detrick said.

The Fed's current policy stance is seen as helping Obama. Consumer confidence recently rose to a more than 4-year high, and housing prices are rising again. However, unemployment remains at 7.9 percent nationwide, and the lack of good jobs is constraining growth.

LOOKING AHEAD

Regardless of the winner in Tuesday's election, the market will have one less uncertainty to deal with. It will shift its focus to the roughly $600 billion in mandated spending cuts and tax increases that could kick in next year and send the U.S. economy reeling - if a deal to prevent it is not reached.

The possibility of a new recession - if Congress fails to agree on how to avoid the cliff - has many market participants counting on resolution, with the election as a variable in terms of when any legislation will pass - not if it will happen.

The end result in both an Obama or a Romney presidency would be a deal. But the status quo would probably mean a more protracted solution and market volatility, according to Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, in Menomonee Falls, Wisconsin.

"From an investing standpoint, what I care more about is the likelihood of getting some sort of deal to avoid the tax increases and spending cuts at the end of the year," he said.

(Wall St Week Ahead runs every Friday. Questions or comments on this column may be emailed to: rodrigo.campos(at)thomsonreuters.com)

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